Startup funding jumps 25% amid ‘bubble’ fear
The data increasingly indicates that the boom in financing is being led by midand late-stage rounds of over $50 million, and is now trickling down to even early-stage transactions.
Total money poured into startups increased by 25% to $10.9 billion in the first nine months of 2019 as compared to the same period in the previous year, even as the total number of deals fell by 26% to 937 transactions, according to the latest data from Tracxn. The data increasingly indicates that the boom in financing is being led by midand late-stage rounds of over $50 million, and is now trickling down to even early-stage transactions. “Right now, all 3 Vs of a ‘bubble’ are at play in the technology investing world — volume (number of investments), value (valuations vs fundamentals) and velocity (time to an investment decision and/or markups between rounds),” said Avnish Bajaj, MD at Matrix Partners India, an early backer of companies like Ola and Quikr.
Several startups have seen a significant jump in their valuation in a matter of months, across sectors and stages. For instance, home services marketplace UrbanClap’s valuation nearly doubled to $930 million in eight months and Meesho’s valuation nearly tripled to $700 million in a similar period. Both startups closed their new rounds in August.
The fast pace of deal-making is being led by Sequoia Capital India at the seed stage, with several other VC firms like Matrix Partners, Lightspeed, Accel India and Chiratae Ventures also increasing the number of investments at the early stage over the last few months. At the same time, New York-based Tiger Global Management has returned, closing over 20 new midto late-stage investments in India already this year.
In such an environment, entrepreneurs have been able to raise capital on their own terms, with investors actively chasing them. But this influx of capital has also led to a high cash burn in several sectors, led by online food delivery where Zomato and Swiggy are together said to be losing $60-80 million a month. Other sectors where startups are aggressively spending money include digital media, online pharma delivery and urban mobility.
The increasing worry is that investors who don’t have permanent funds dedicated to venture capital in India, like in 2014-15, may take a pause if sentiment turns negative. This sentiment — where valuation of private technology companies is increasingly under scrutiny after the failed IPO of WeWork — could have an impact in the coming months.
Even as they urge caution, Bajaj of Matrix and Avendus Capital co-head (technology) Pankaj Naik say the market is much deeper now in terms of the breadth of startups able to attract a significant amount of funds, their maturity in terms of their financial metrics and even the size of the opportunity as compared to 2014-15. For instance, new startups like Bounce, Vogo, QuickRide and Rapido have come up in urban mobility, which was expected to be dominated by Ola and Uber.
For now, the capital flow is expected to continue as the longterm India digital story continues to be attractive, but investors are likely to get more discerning and focus on companies with better unit economics with a path to profitability. And even as startups continue to mop up a record amount of capital, investors said that at the same time they are starting conversations to reduce expenditure now and ensure that they can make the same amount of money last longer. This, many feel, could be good in the long run.
“Startups are bracing for a longer fund-raising cycle and ensuring they are capitalised well for the next calendar year. In series B and onwards, it is already becoming tougher and rounds are dragging, sometimes taking more than six months,” said Vinod Murali, managing partner at venture debt firm Alteria Capital.